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Blue sky surges for German luxury brands

In the busiest dealership buy-sell market in decades, luxury brands are red hot. The result: stratospheric prices for Mercedes-Benz, BMW and Porsche dealerships.

Typical blue-sky multiples for those three brands range from 7 to as much as 10 times adjusted pretax profit, according to the "2014 Year End Haig Report" released this week. After the third quarter of 2014, the report put the top end of those brands' blue-sky range at 7 or 7.5 times earnings.

"I have never seen prices this high for dealerships before, and there's a particular spike on the German luxury" brands, said Alan Haig, president of Haig Partners, a dealership buy-sell advisory firm in Fort Lauderdale, Fla., which puts out the report. "There's a big bet now that the luxury market is going to grow faster than the overall market."

Blue sky is the intangible value of a dealership, expressed as a multiple of adjusted pretax profit. Multiples -- which can vary enormously based on a dealership's location and other factors -- are based on actual adjusted earnings by normally performing stores.

Haig notes that dealerships can sell for blue-sky multiples well outside his estimated typical range, depending on each store's unique circumstances. For example, underperforming stores often trade at higher multiples because buyers expect to turn those stores around and see rising profits.

Why the sharp rise in luxury brands' blue sky in just three months? Haig admits he was undervaluing those brands before.

At least six months ago, industry sources told him German luxury brand stores were "routinely" selling for 10 times or higher, but he was skeptical that those high prices were "routine," he told Automotive News.

"But now I've heard enough from our sources, and I see it in our own deals," Haig said. "I feel confident, and yet surprised, the market is willing to pay 7 to 10 times. I could see it for the underperformers; I see some of them trading at 15 times."

Today, he said, "I don't see a Mercedes-Benz guy selling his store for less than 7 times."

The blue-sky surge is limited to a few luxury brands.

Haig also raised his ranges for typical blue-sky multiples for Audi, Lexus and Jaguar Land Rover, but not as steeply as for Mercedes, BMW and Porsche.

Lexus' blue sky, he noted, has been held back by the brand's eight-store cap on the number of dealerships an auto retailer group can buy. "Public companies tell us they do not consider Lexus acquisitions unless they are very large stores since they are only allowed to own a handful across the country," Haig wrote in the report. His calculations show that publicly traded dealership groups own 24 percent of all BMW stores in the U.S. and 15 percent of all U.S. Mercedes-Benz stores, but only 10 percent of all U.S. Lexus points.

In the face of weak sales for Acura, Cadillac and Infiniti, those brands' blue-sky multiples were unchanged at 3 to 4 times earnings, a level equal to Nissan brand's.

Most brands' values remained steady compared with values given in Haig's third-quarter report. But a few mainstream brands experienced a bump in blue-sky value in the fourth quarter. The report raised values for Chevrolet and Buick-GMC, to 3 to 4 times earnings, noting "the recall crisis is over and their trucks and SUVs are selling well." Mazda stores' blue sky also rose slightly, to 3 to 4 times earnings.

Given that blue-sky values are a multiple of earnings, widespread losses at Volkswagen, Volvo and Mini dealerships led the Haig Report to decide not to designate blue-sky multiples for those brands.

Instead, Haig said most VW stores would sell for $500,000 to $3 million, Mini dealerships would fetch about $500,000 to $2 million, and a Volvo store would be priced at $100,000 to $500,000.

Sales of Volkswagen and Mini vehicles "were off significantly last year," Haig said. "A lot of dealers said, 'I don't see any hope for these franchises recovering for a long time.'"